When a stock is down, and trading like the SDARS equities have been, the “shorts” always seem to become a popular subject. People speak of market manipulation, and seem to run off an a tangent that those that are short are the source of all of the problems that has an equity on the down side.

With this merger, there are many reasons to short. While shorting equities is something that I personally am not prone to do, I do understand the concept and the market. I simply make a choice not to short very often. Specific to the merger, there is an arbitrage play that potentially has a lot of people shorting Sirius. The strategy is to go long XM and Short Sirius (This strategy requires that the merger pass). If an investor were to do this, they will basically lock in the arbitrage spread upon the merge.

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With the Department of Justice already having issued their decision, it is almost a foregone conclusion that the FCC will at some point follow suit. Thus, there are many who like the guaranteed spread, and short Sirius while going long XM.

Another short strategy that has existed for quite some time comes from those with convertible shares. The short the stock to lock in the spread on their convertible shares. Most convertible shares are held by institutions.

Others simply short the stock because it is an easy play when the equities are trading in a channel that carries a virtual cap until the merger decision happens, and the companies give some sort of guidance. Equities that are locked into ranges minimize the risk on the short side. When they get to the bottom of the channel, the shorts cover.

Sirius satellite Radio has been on the REG SHO list lately, and some people express concern over this. In simple terms, there is a failure to deliver the shares that have been sold short. The short investor is “naked” because he sold shares that really “in theory” do not exist. A short sells shares to another investor that buys them. Those shares are “borrowed” by the Broker from another account and then sold to the buyer. The problem arises when the brokerage house does not have any shares to borrow. When this happens, it is termed a failure to deliver. If there are too many failures to deliver, the equity gets placed on the REG SHO list.

No all of this short discussion leads to the next thought that often happens when the subject of shorts arises. The short squeeze. While many think that a high level of shorts will necessitate a short squeeze, this is not the case. Yes, to a certain extent, a small short squeeze can happen, but in my opinion, it is not very likely in the current situation with Sirius. Sirius currently sits below the 5, 10, 20, 50, 100 and 200 day moving average. This means that, on average, people that have bought this equity over the past 200 days are down. The longer people are down in an equity, the more likely they are to accept a break even proposition. The 200 day moving average sits at about $3.30. On a technical analysis side, there are several resistance points standing in the way of a short squeeze. The strongest are at $2.90 and $3.30.

If those that are in the equity feel a stronger and stronger desire to simply break even, there will be plenty of shares on the market that the shorts can use to cover. By definition, a short squeeze needs to have a scarcity of sellers to be effective. The real effective point of a short squeeze for Sirius, in my opinion, is between current prices to just under the $4.00 price range. At anything above $3.50, tired longs could well be willing sellers, and once those shares hit the boards, the short squeeze will taper off. Thus, it is my opinion that those hoping to see a concerted run (above $4 and towards $5) fueled by shorts scrambling to cover will not be very likely to happen. Simply stated, too much time has passed in this merger process. Had the DOJ ruled last November, and an FCC decision was expected in December, the short squeeze could have had much more potential.

Right now, shorts have a few safety nets in place. An equity in a channel, two strong resistance points, no announcement by the FCC, and longs that are battle fatigued. A merger announcement will take away some of that safety, and a pop on the news is expected. If the street feels that a decision is 1 to 2 weeks away, the shorts will have already begun covering next week, and until that FCC announcement happens, they are fairly insulated from the equity running away on them.

Time on a merger decision is likely quite soon. This will have shorts considering when to lock in their profits, but with all of those safety nets in place, they can still have a measure of confidence. At this point, they are trying to call the bottom, and realistically, the bottom is quite near to current levels.

For those that think the merger will solve the short situation…..there will be short traders who will also try to call the top of the pop on an FCC announcement, and the cycle can start again. The solution is solid company performance, and a clear demonstration the profits are happening sooner rather than later.

Some people are not fans of technical analysis, but one thing is certain. The equities have many investors who have been locked into an equity position that has had a ceiling for so long that it becomes hard to imagine that ceiling going away. These equities are trading on perceptions more now than ever before.

Readers who want more detail on my opinions on this subject can tune into the latest Sirius Buzz Radio show titled Satellite Radio Investment Perceptions

Position – Long Sirius, Long XM